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When companies thrive in their home base, temptation can be great to expand to new locations, either across town or around the world. The problem: Many companies think of geographic strategy as a short-term checkers match rather than as a long-term chess game.
"Many companies don't understand that what works in one location may not work somewhere else."
"The decision to expand is sometimes driven by the wrong reasons," says Associate Professor Juan Alccer, who teaches in the Strategy Unit at Harvard Business School. "In many cases companies are not thinking of the long-term consequences of what they are doing." Such snap decisions can result in geo-mistakes that sap energy out of an organization and cause it to lose focus on what it was doing well in the first place. Geographic expansion should provide access to a fresh market and to additional resources. But companies that take a strategic view also realize that the new territory should increase a firm's competitive advantage by complementing and adding value to its current business. After all, the strategic value of a new location depends on three things, Alccer says: the strength of available resources, such as nearby supporting industries; the company's ability to seek and retrieve knowledge in this
Timing is critical
A crucial consideration for managers to get right early on is whether the business can afford to spend the required resourcesespecially when it means siphoning time and attention away from an existing successful business. "When you open a new operation, it requires not only money but also the time and energy of managers to make sure it's going the right way, and that means you can't focus as much on the base business back home," Alccer says. In addition to making sure the resources are in place, corporate strategists must decide which locations to target. Companies often blindly follow their rivals from city to city or country to country without analyzing whether that same situation is right for them. Many businesses that jumped on the China expansion bandwagon are now sorry they made that move, says Alccer. "They are realizing that they were not well prepared for the market or that it wasn't the right market for them." Alccer advises companies to consider
which certain information is assigned to specific employees, who are not privy to the whole picture.
Going global
Expanding operations to another country brings a whole new set of complications, says Alccer. For one, businesses that expand internationally need to adjust their offerings to a completely different market since each country has its own "knowledge profile." "Companies often don't consider adapting products to the different markets," he says. "Successful companies that expand assume that by doing the exact same thing they are doing in the home market, they will be successful overseas. But many companies don't understand that what works in one location may not work somewhere else. We tend to believe that technology has made us homogeneous, but distance matters. Countries are different; consumers are different. People in India are different than the people in the United States."
Vodafone learned that lesson the hard way. The London-based telecommunications venture initially forayed into Japan on a learning expedition to better understand the country's sophisticated consumers, but was soon captivated by the established market. The exploratory mission quickly morphed into sell mode. Vodafone bought handsets used in Europe in bulk and tried to introduce them in Japan. Unfortunately, Japanese consumers were hooked on a completely different technology, forcing Vodafone to abandon ship after a few rocky years. "Vodafone needed to study the Japanese handset," Alccer says. "When you enter a market to provide a service or product and try to learn at the same time, these two [goals] can be conflicting. You can successfully do both at the same time, but you need to be conscious of the two activities." Another consideration for an international expansion is that the resources required are greatly magnified, and success might only make matters worse in the short run. "When you start
to expand overseas, you often see a negative effect on your operations back home. You are literally going through growing pains, and the more quickly you grow, the more likely you are to have problems."